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WMK > SEC Filings for WMK > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Form 10-K for WEIS MARKETS INC


14-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Weis Markets, Inc., its operations and its present business environment. The MD&A is provided as a supplement to and should be read in conjunction with the consolidated financial statements and the accompanying notes thereto contained in "Item 8. Financial Statements and Supplementary Data" of this report. The following analysis should also be read in conjunction with the Financial Statements included in the 2012 Quarterly Reports on Form 10-Q and the 2011 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, as well as the cautionary statement captioned "Forward-Looking Statements" immediately following this analysis. This overview summarizes the MD&A, which includes the following sections:

Company Overview - a general description of the Company's business and strategic imperatives.

Results of Operations - an analysis of the Company's consolidated results of operations for the three years presented in the Company's consolidated financial statements.

Liquidity and Capital Resources - an analysis of cash flows, aggregate contractual obligations, and off-balance sheet arrangements.

Critical Accounting Estimates - a discussion of accounting policies that require critical judgments and estimates.

Company Overview

General

Weis Markets, Inc. was founded in 1912 by Harry and Sigmund Weis in Sunbury, Pennsylvania. Today, the Company ranks among the top 50 food and drug retailers in the United States in revenues generated. As of December 29, 2012, the Company operated 163 retail food stores in Pennsylvania and four surrounding states:
Maryland, New Jersey, New York and West Virginia.

Company revenues are generated in its retail food stores from the sale of a wide variety of consumer products including groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, deli products, prepared foods, bakery products, beer and wine, fuel, and general merchandise items, such as health and beauty care and household products. The Company supports its retail operations through a centrally located distribution facility, its own transportation fleet, three manufacturing facilities and its administrative offices. The Company's operations are reported as a single reportable segment.

Page 10 of 43 (Form 10-K)

WEIS MARKETS, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations: (continued)

Company Overview (continued)

Strategic Imperatives

The following strategic imperatives will be focused upon by the Company to attempt to ensure the success of the Company in the coming years:

Establish a Sales Driven Culture - The Company continues to focus on sales and profits growth, improved operating discipline, increased productivity and positive cash flow. The Company believes disciplined growth will increase its market share and operating profits, resulting in enhanced shareholder value. The Company's method of driving sales includes flawless preparation and execution of sales programs, investing in new stores, remodels and strategic acquisitions. Communicating clear executable standards and aligning performance measures across the organization will help instill a sales driven operating environment.

Continuously Upgrade Organizational Talent Pool - In support of the Company's growth and sales building strategies, the Company is committed to growing leaders at every level throughout the organization through enhanced leadership development programs, succession planning, and establishing rewarding career paths. The Company believes that associate talent directly impacts the ability to execute strategic plans and views this as a strategic imperative for future growth.

Become More Relevant to Consumers - Understanding the consumer is crucial to the Company's strategic plan. Research can be done by studying core consumers and casual consumers' wants and needs. Measuring customer satisfaction and sharing insights across the organization will help communication between management and its consumers. The Company thrives on customer loyalty through using local produce and merchandise. It will continue to invest in its growth by investing in new stores, remodels and additions and strategic acquisitions, to help retain and attract new consumers.

Create Meaningful Differentiation - The Company has identified product pricing, locally focused store assortments, shopping experience, overall convenience and customer service as critical components of future success. The strategy includes developing improved customer service training and setting customer service measurements and goals. As part of this strategy, management is committed to offering its customers a strong combination of quality, service and value. It will continue to offer competitive prices on branded and private brand products to exceed customers' expectations.

Significantly Improve Decision Support and Measurement - The Company will continue to make investments in its information technology systems and distribution network. This will help improve associate productivity, overall store conditions and the overall customer experience with user-friendly, support driven systems. These systems will continue to play a key role in the measurement of the Company's strategic decisions and provide valuable insight into customer behavior, shopping trends, and financial returns. Management will continue to streamline its supply chain by focusing on improving inventory turns, cost per case, in-stock position and overall service levels, which will help improve in-store conditions and result in increased sales and profits.

Focus on Sustainability Strategies - The Company continues to focus on green best-practices, conservation, food and agricultural impact and social responsibility. The Company views being good stewards in the communities where we operate, as an important component of overall success. In 2012, the Company recycled over 46 million pounds of cardboard, 1.7 million pounds of plastic bags, 375 tons of paper and over 40 tons of pharmacy plastics. Food sustainability and the impact on the environment will continue to influence the Company's strategic plans.

Page 11 of 43 (Form 10-K)

WEIS MARKETS, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations: (continued)

Results of Operations

Analysis of Consolidated Statements of Income
(dollars in thousands except per share amounts)
For the Fiscal Years Ended December 29, 2012,                                                                 Percent Changes
December 31, 2011 and December 25, 2010               2012             2011             2010            2012 vs.           2011 vs.
                                                   (52 weeks)       (53 weeks)       (52 weeks)           2011               2010
Net sales                                         $  2,701,405     $  2,752,504     $  2,620,378               (1.9 )%             5.0 %
Cost of sales, including warehousing and
distribution expenses                                1,958,852        2,016,649        1,906,753               (2.9 )              5.8
Gross profit on sales                                  742,553          735,855          713,625                0.9                3.1
Gross profit margin                                       27.5 %           26.7 %           27.2 %
Operating, general and administrative expenses         615,521          621,575          608,309               (1.0 )              2.2
O, G & A, percent of net sales                            22.8 %           22.6 %           23.2 %
Income from operations                                 127,032          114,280          105,316               11.2                8.5
Operating Margin                                           4.7 %            4.2 %            4.0 %
Investment income                                        3,468            3,326            2,069                4.3               60.8
Investment income, percent of net sales                    0.1 %            0.1 %            0.1 %
Other income                                               414                -                -              100.0                  -
Other income, percent of net sales                         0.0 %              - %              - %
Income before provision for income taxes               130,914          117,606          107,385               11.3                9.5
Provision for income taxes                              48,403           42,022           39,094               15.2                7.5
Effective tax rate                                        37.0 %           35.7 %           36.4 %
Net income                                        $     82,511     $     75,584     $     68,291                9.2 %             10.7 %
Net income, percent of net sales                           3.1 %            2.7 %            2.6 %
Basic and diluted earnings per share              $       3.07     $       2.81     $       2.54                9.3 %             10.6 %

Income is earned by selling merchandise at price levels that produce revenues in excess of cost of merchandise sold and operating and administrative expenses. Although the Company may experience short term fluctuations in its earnings due to unforeseen short-term operating cost increases, it historically has been able to increase revenues and maintain stable earnings from year to year.

Net Sales

The Company's revenues are earned and cash is generated as merchandise is sold to customers at the point of sale. Discounts, except those provided by a vendor, are recognized as a reduction in sales as products are sold or over the life of a promotional program if redeemable in the future.

Total store sales decreased 1.9% from 2012, a 52-week period, compared to 2011, a 53-week period. Excluding fuel sales, total sales decreased 2.3%. Adjusting for the extra week in 2011, there was no change in total sales from 2012 to 2011, while total sales increased 4.1% in 2011 compared to 2010. Excluding fuel sales and adjusting for the extra week in 2011, total sales decreased 0.4% in 2012 compared to 2011, and increased 3.3% in 2011 compared to 2010.

When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable when it has been in operation for five full quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.

Comparable store sales decreased 2.0% in 2012, a 52-week period, compared to 2011, a 53-week period. Excluding fuel sales, comparable store sales decreased 2.4% in 2012 compared to 2011. Adjusting for the extra week in 2011, comparable store sales decreased 0.1% in 2012 compared to 2011 and increased 4.2% in 2011 compared to 2010. Excluding fuel sales and adjusting for the extra week in 2011, comparable store sales decreased 0.5% in 2012 compared to 2011 and increased 3.5% in 2011 compared to 2010.

Page 12 of 43 (Form 10-K)

WEIS MARKETS, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations: (continued)

Results of Operations (continued)

The Company's operating regions continue to be hindered by slow economic growth, high unemployment and declining household income, particularly in Northeastern Pennsylvania, New York's Southern Tier and parts of Central Pennsylvania. Many customers remain cautious in their spending and continue to focus on value and long term savings. To meet these needs, the Company continued to make significant investments in its "Price Freeze" and "Get Grillin'" promotional programs. The Company ran two successful "Price Freeze" programs in 2012. The first program froze prices of approximately 1,700 staple items for a 90-day period. The second "Price Freeze" program froze prices on over 1,000 items for 100 days, in honor of the Company's 100th anniversary. The Company launched a tenth round of its "Price Freeze" program on January 6, 2013. This program froze prices on more than 2,000 products for a 90-day period. The "Get Grillin'" promotional program was a reduced pricing program on top items throughout the store that our customers found to be the most seasonally relevant. This program also lowered prices of approximately 1,200 items for a thirteen-week period.

In addition to the "Price Freeze" and "Get Grillin'" promotional programs, the Company also offered its "Gas Rewards" program in most markets. The "Gas Rewards" program allows Weis Preferred Shoppers club card members to earn gas discounts resulting from their in-store purchases. Customers can redeem these gas discounts at Sheetz convenience stores, located in most of the Company's markets, at Manley's Mighty Mart Valero locations, in the Binghamton, NY market or at any of the twenty-two Weis Gas-n-Go locations.

The Company continued to employ a disciplined marketing and advertising strategy, along with targeted promotional activity in key markets, to help maintain its market share and increase its profits. During 2012, the Company generated a 1.7% increase in average sales per customer transaction while the number of identical customer store visits decreased by 3.4%. In the fourth quarter of 2011, in preparation for the Company's 100thanniversary celebration in 2012, the Company launched its Gold Card program, an extension of its existing Preferred Club Shopper program. The Gold Card program targets the Company's best shoppers with personalized offers and strong values to help them save money.

In 2011, the Company launched "Your Neighbors, Our Farmers" local produce campaign, highlighting the long-term contributions of thirteen farmers and their families who supply Weis Markets' stores with local produce. The Company remains committed to buying local produce, which helps conserve resources and benefits the economies of the states where Weis Markets operates stores. Adjusting for the extra week in 2011, produce sales increased 1.6% in 2012 compared to 2011 and 4.9% in 2011 compared to 2010. These increases are attributed to an increase in produce units sold, solid in-store execution of merchandising plans, hotter ads in key categories and product inflation in 2011. In addition, floral sales increased 3.9% in 2012 compared to 2011, adjusting for the extra week in 2011, as a result of strong sales in the rose and bouquet categories. Floral sales increases are now occurring on a weekly basis as a result of improved quality, variety and selection, as well as in-store freshness, merchandising and customer service.

Additionally within the fresh category, deli sales decreased 2.8% in 2012 compared to 2011, adjusting for the extra week in 2011. Sales declined as a result of emergency sales surges in September 2011 caused by flooding due to Hurricanes Irene and Lee, which impacted regions of Pennsylvania and southern New York, where the majority of the Company's stores are located. Customers were unable to prepare meals at home for extended periods of time in 2011, resulting in increased deli sales. Seafood sales increased 3.5% in 2012 compared to 2011, adjusting for the extra week in 2011. The increase primarily resulted from increased fresh varieties and merchandising strategies that promote shrimp, fresh fillets and crab categories.

Adjusting for the extra week in 2011, pharmacy sales decreased 3.1% in 2012 compared to 2011 and increased 2.3% in 2011 compared to 2010. In 2012, pharmacy sales were impacted by a $10.4 million decline due to the conversion of brand drugs to generic. Generics are sold at lower retail prices, decreasing total pharmacy sales. Although sales dropped significantly in dollars because of the increased utilization of generic pharmaceuticals, the number of units sold in comparable stores increased 0.4% in 2012 compared to 2011.As part of management's strategy to offset this decline, the Company has expanded its immunization programs.

Page 13 of 43 (Form 10-K)

WEIS MARKETS, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations: (continued)

Results of Operations (continued)

Adjusting for the extra week in 2011, dairy sales decreased 1.0% in 2012 compared to 2011. The sales decline is attributed to deflationary pressure on large commodity markets such as milk. However, adjusting for the extra week in 2011, dairy sales increased 6.7% in 2011 compared to 2010, as a result of continued product inflation throughout the dairy category in 2011. Management anticipates commodity prices within the dairy category to increase slowly throughout 2013.

The Company is committed to maintaining retail prices, but recognizes that inflationary pressures could cause the Company to raise prices in order to maintain margin rates.

Management remains confident in its ability to generate sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company's competitive position.

Cost of Sales and Gross Profit

Cost of sales consists of direct product costs (net of discounts and allowances), warehouse and transportation costs, as well as manufacturing facility operations.

According to the latest U.S. Bureau of Labor Statistics' report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index increased 2.4% in 2012, 4.8% in 2011 and 0.4% in 2010. The annual Seasonally Adjusted Producer Price Index for Finished Consumer Foods increased 2.5% for 2012, 6.3% for 2011 and 3.9% for 2010. Despite the fluctuation of retail and wholesale prices, the Company maintained a gross profit rate of 27.5% in 2012, 26.7% in 2011 and 27.2% in 2010. Even though the U.S. Bureau of Labor Statistics' index rates may be reflective of a trend, it will not necessarily be indicative of the Company's actual results.

The Company experienced a LIFO charge of $1.2 million for 2012, compared to a charge of $8.7 million for 2011 and a charge of $2.9 million in 2010. Significant wholesale price inflation occurred during 2011. The Company is expecting moderate wholesale price inflation in 2013.

The Company's profitability is impacted by the cost of oil. Fluctuating fuel prices affect the delivered cost of product and the cost of other petroleum-based supplies such as plastic bags. As a percentage of sales, the cost of diesel fuel used by the Company to deliver goods from its distribution center to its stores remained unchanged in 2012 compared to 2011 and increased 0.1% in 2011 compared to 2010. According to the U.S. Department of Energy, the average diesel fuel price for the Central Atlantic States increased $0.18 per gallon to $4.11 per gallon as of December 29, 2012, compared to $3.93 per gallon as of December 31, 2011. Based upon the U.S. Energy Information Administration's current projections, the Company is expecting diesel fuel prices to remain fairly steady throughout 2013.

Although the Company experienced product cost inflation in 2012, 2011 and 2010, management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors.

Operating, General and Administrative Expenses

Business operating costs including expenses generated from administration and purchasing functions, are recorded in "Operating, general and administrative expenses." Business operating costs include items such as wages, benefits, utilities, repairs and maintenance, advertising costs and credits, rent, insurance, equipment depreciation, leasehold amortization and costs for outside provided services.

Page 14 of 43 (Form 10-K)

WEIS MARKETS, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Results of Operations (continued)

The Company may not be able to recover rising expenses through increased prices charged to its customers. Any delay in the Company's response to unforeseen cost increases or competitive pressures that prevent its ability to raise prices may cause earnings to suffer. A majority of our associates are paid hourly rates related to federal and state minimum wage laws. Although we have and will continue to attempt to pass along any increased labor costs through food price increases, there can be no assurance that all such increased labor costs can be reflected in our prices or that increased prices will be absorbed by consumers without diminishing consumer spending to some degree. However, to date, we have not experienced a significant reduction in profit margins as a result of changes in such laws, and management does not anticipate any significant related future reductions in gross profit margins.

Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise over 60% of the total operating, general and administrative expenses. Employee-related costs, inclusive of the extra week in 2011, increased 1.0% in 2012 compared to 2011 and 3.3% in 2011 compared to 2010. As a percent of sales, employee-related costs increased 0.4% and direct store labor increased 0.2% in 2012 compared to 2011.

The Company expensed $1.1 million, $111,000 and $798,000 in 2012, 2011 and 2010, respectively, due to adjustments made to the non-qualified supplemental executive retirement plan resulting from a rise in the equity market. (see Note 6 Retirement Plans, of Notes to the Consolidated Financial Statements.)

The Company's self-insured health care benefit expenses increased 5.4% in 2012 compared to 2011 and decreased 0.5% in 2011 compared to 2010. The Company remains concerned about the potential impact that The Patient Protection and Affordable Care Act will have on its future operating expenses.

Depreciation expense was $50.7 million, or 1.9% of total sales, for 2012 compared to $59.4 million, or 2.2% of total sales, for 2011 and $55.1 million, or 2.1% of total sales, for 2010. In the first quarter of 2012, the Company changed its accounting policy for property and equipment. The decrease in depreciation expense resulted from the Company's change in depreciation method from accelerated methods to straight-line, despite additional capital expenditures as the Company implements its capital expansion program. See Note 1 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on the Company's change in accounting estimate related to depreciation expense. See the Liquidity and Capital Resources section for further information regarding the Company's capital expansion program.

The Company's interchange fees for accepting credit and debit cards decreased 1.1% to $19.1 million in 2012 compared to 2011 and increased 8.3% to $19.3 million in 2011 compared to 2010. The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the Federal Reserve to set rules to implement caps on debit card interchange fees. As a result of these rules, the Company estimates that its "Operating, general and administrative expenses" were impacted by a 0.19% decline in debit card interchange fees as a percent of debit card sales.

Retail store profitability is sensitive to volatility in utility costs due to the amount of electricity and gas required to operate the Company's stores and facilities. The Company is responding to this volatility in operating costs by employing conservation technologies, procurement strategies and associate energy awareness programs to manage and reduce consumption. The Company replaced its existing lighting system at its 1.1 million square-foot distribution center with low watt florescent and LED lighting, reducing energy consumption by 80% and operating costs by 30%. Its new store prototypes contain skylights that harvest natural daylight to reduce lighting costs, LED lighting and motion sensors in its frozen departments and energy management systems. All Company stores have an assigned Energy Captain to promote in-store energy conservation. In 2012, the Company opened its first LEED (Leadership in Energy and Environmental Design) store in Fogelsville, PA. This store also received a GreenChill Gold certification for its advanced refrigeration system. Four other stores have also been recertified with GreenChill Silver certifications. Through these efforts, the Company has decreased electricity consumption by over 4.4 million kWh, reducing energy costs by $2.7 million. Through these initiatives, with the added benefit of clement weather and a declining market in electricity costs, the Company's utility expense decreased by 8.6% in 2012 compared to 2011 and 6.3% in 2011 compared to 2010.

Page 15 of 43 (Form 10-K)

WEIS MARKETS, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Results of Operations (continued)

Above average snowfall and significant ice storms struck the Mid-Atlantic states, the Company's operating region, in the first quarter of 2011. In order to hedge the Company's potential snow removal expense against drastic swings and divert the associated risk, the Company has entered into a fixed rate contractual arrangement for snow and ice removal. As a result, these expenses decreased $336,000 in 2012 compared to 2011. Snow removal costs also decreased $150,000 in 2011 compared to 2010, since the snow fall was above average in the Mid-Atlantic states in 2010.

The Company's income from the sale of cardboard salvage, decreased $1.5 million in 2012 compared to 2011. This was due to decreased price per ton of cardboard in 2012 compared to 2011 and a reduction in volume salvaged. Cardboard salvage income increased $1.2 million in 2011 compared to 2010, when market prices were significantly higher.

Investment Income

The Company's investment portfolio consists of marketable securities which currently includes municipal bonds and equity securities. The Company classifies all of its marketable securities as available-for-sale. The Company experienced a $615,000 decrease on gains recognized on the sale of equity securities in 2012 compared to 2011 but experienced a $975,000 increase in 2011 compared to 2010. The Company's investment income during 2012 and 2011 also increased as a result of strategic investment decisions weighed heavily toward municipal bonds, starting at the end of 2010.

Other Income

Upon completion, the Company recognized a gain of $414,000 on the bargain purchase of three former Genuardi locations in the Delaware Valley region of Pennsylvania, from Safeway Inc., in the second quarter of 2012.

Provision for Income Taxes

The effective income tax rate was 37.0%, 35.7% and 36.4% in 2012, 2011, and 2010, respectively. The rate increased in 2012 primarily due to the decrease in the domestic production deduction also referred to as the Section 199 deduction. The qualifying manufacturing sales decreased during 2011 resulting in a sizeable provision to return adjustment which results in a higher effective tax rate. The 2012 manufacturing sales also decreased therefore the deduction was reduced compared to the 2011 deduction resulting in a higher effective tax rate. The effective income tax rate differs from the federal statutory rate of 35% primarily due to the effect of state taxes, net of permanent differences.

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